Ferroglobe PLC (GSM) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Globe Specialty Metals Second Quarter Fiscal 2013 Earnings Investor Call. [Operator Instructions] . I would now like to introduce your host for today's conference, Mr. Malcolm Appelbaum, Chief Financial Officer. Mr. Appelbaum, please begin.

Good morning. I'm going to read a brief statement and then hand it over to our CEO, Jeff Bradley. Statements made by management during this conference call that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Globe's most recent SEC filings and the exhibits to those filings. Jeff?

Good morning, everybody. Thank you for joining us on the call this morning. In our second quarter, sales were $179.9 million and shipments of silicon metal and silicon alloys to customers was 61,972 tons. Additionally, we shipped more than 25,000 tons of silica fume to customers. EBITDA on a comparable basis for the quarter was $30.4 million. We generated $0.20 per share in earnings. For calendar year in 2013, we have contracts in more than 80% of our silicon metal and silicon alloy capacity. As in the past, we have business at fixed prices for the year, business-tied to indexes and quarterly business. 1/2 of our business is tied to index and the balance is fixed to the firm price. Our fixed-price business and index business is an aggregate price to above the current public indexes. And as we've always done in the past, we have left room for spot business. We are seeing improving demand and positive signs from the major end market that consume our products directly and indirectly, including automotive, home building, consumer goods, construction, steel, oil and gas, drilling and solar. In anticipation of a strong year -- of a stronger pricing environment in 2013, we passed on some lower-priced business, lower-price, below market business presented to us at the end of the year. We've done this in past years at the end of the pricing season only to realize better returns the following year. As I mentioned on the last call, we are continuing to develop our revenue streams, such as fume and third-party sales of our upstream raw materials. One of our most promising new streams is silica fume. This product is produced during the silicon metal and ferrosilicon smelting process. It's a key ingredient in concrete, oil and gas well grout and refractory products. We produce more than 100,000 metric tons annually of this fume. The end markets for the fume include construction, infrastructure and oil and gas. Next time you see an office building being built, or a bridge, there's a good chance our fume is in the concrete. Our fume is in the grout surrounding the pipe and the deep wells being drilled, the frac-ing and the production of all natural gas. All these markets are improving and growing, and we are very optimistic about the business levels for this year. We instituted price increases across the board on all of these end markets. We stepped higher earnings in this segment as a result. In the operations side, we continue to drive our cost savings initiatives, and we achieved positive results. Our production costs were lower than our first fiscal quarter which contributed to the increase in our gross margin. And we have ongoing projects at all of our plants to drive costs even lower. The past quarter, we had planned outages at our Becancour, Canada plant and our alloy plants. The outages at the Becancour plant should position that facility in 2013 to be the most productive year in the history of the plant. We are also in the middle of a 90-day outage at our alloy plant. For this quarter, we have a 30-day planned outage on one of our furnaces in Niagara Falls. By the way, Niagara Falls operated very well in 2012. It achieved the highest production since we reopened it in '09. And the last quarter was the most productive quarter since the reopening. Other than an outage in Beverly in April and May, we do not have any more outages planned for the balance of the fiscal year. We continue to pursue organic growth opportunities and potential accretive acquisitions. We will continue to work to lower costs to improve the operating margins, as we have done this past quarter. We will continue to analyze all the opportunities presented to us in the future to determine if they fit our investment criteria. At this point, I'm going to turn things back over to Mal Appelbaum.

Thank you, Jeff. We have a few financial-related slides, which you will view automatically if you're listening to the call through our website. Just click on the maximize button on the bottom of the window to expand the slides to full screen. Otherwise, the slides are posted in the Events & Presentations section of our website, www.glbsm.com. Adjusted EBITDA for our fiscal second quarter ended December 31 was $30.2 million, which is approximately $2 million higher than expected. This better-than-expected result came from lower production cost and lower SG&A expense. These expense declines in the quarter mostly offset the impact of the decrease in shipments from our first quarter. Silicon metal shipments decreased 13% or 5,200 metric tons in the second quarter from the first quarter, and silicon-based alloy shipments decreased 10% or 2,800 metric tons. The decline was due to the timing of contractual shipments to our customers and a modest amount of inventory build, which in total, including the timing of contractual shipments, increased inventories by $10.7 million. As Jeff indicated, we built this modest amount of inventory instead of selling at today's spot pricing with the expectation that pricing will improve. Silicon metal average selling prices increased 4% in the second quarter, above the first quarter, primarily as a result of higher production costs with our 2 joint ventures. Excluding the joint ventures, third-party silicon metal average selling prices remained flat. Silicon-based alloy average selling prices declined 5% in the quarter, primarily from a modest reduction in magnesium ferrosilicon pricing for which we benefited from lower rare earth costs. Cash cost to production per ton in the second quarter declined by approximately $4 million from the first quarter, as a result of cost control initiatives and of not having the weather-related power outages that we had in the first quarter. Reported EBITDA totaled $34.2 million in the quarter and included benefits of $1.7 million for revaluing an equity investment, and $3.7 million for remeasuring our stock option liability. These benefits were partially offset by transaction-related expenses at $1.3 million. Adjusted EBITDA in the second quarter was $30.2 million, compared to $31.1 million in the first quarter. Sales in the second quarter decreased 10% from the first quarter, as total shipments declined 11% or 8,000 metric tons. Our second quarter gross margin was 18% compared to 16% in the first quarter. The increase is almost entirely related to the reduction in production costs. SG&A expense was $9.1 million in the second quarter and included a benefit of $3.7 million from remeasuring our stock option liability and $1.3 million of transaction-related and due diligence expenses. Excluding these items, SG&A expense was $11.4 million in the quarter, a $1.9 million decrease from the first quarter. Reported results were impacted by transaction-related and due diligence expenses, the benefit from remeasuring the stock option liability and from a gain we used to revalue an equity investment. Excluding these benefits and charges, adjusted EBITDA for the second quarter was $30.2 million. We consolidated the joint ventures have with Dow Corning at our Alloy, West Virginia and Becancour, Canada plants. Dow Corning's 49% interest in those joint ventures equated to EBITDA of $3 million in the second quarter. SG&A expense prior to the benefit for the remeasurement of stock options and the charge for transaction and due diligence expenses, was $11.4 million, which was a decline of $1.9 million from the first quarter. This decline was largely related to a decrease in variable compensation expense for calendar 2012. Results include a $1.6 million charge for foreign exchange losses as compared to a $500,000 gain in the first quarter, which primarily related to the mark-to-market of foreign currency hedges and working capital denominated in foreign currencies. Adjusted EBITDA was $30.2 million, and adjusted diluted earnings per share were $0.15. Next slide is a sales bridge showing the $20.8 million decrease in sales in the second quarter. Slightly higher average selling prices contributed $1 million to sales, while the lower volumes reduced sales by $21 million. The next slide is an EBITDA bridge showing the $900,000 decrease in adjusted EBITDA from the first to the second quarters. Volume, price and sales mix served to lower EBITDA by $5.3 million, while reduced production costs and SG&A expense increased EBITDA by $5.9 million. Foreign exchange losses also reduced EBITDA by $2.2 million from the previous quarter. Next slide shows cash flow for the period. Cash used in operations in the second quarter was $3.2 million. Working capital increased by $30.6 million in the quarter, which included a $10.7 million increase in inventories and a $20.3 million decrease in accrued liabilities, which was largely related to variable compensation payments and income tax payments. Cash capital expenditures totaled $10.2 million in the quarter and dividend payments to shareholders were $14.1 million in the quarter. At December 31, we had $163.5 million of cash and $153.1 million of debt. Income tax expense for the second quarter totaled $5.4 million for an effective rate of 26%. This rate was artificially low, helped by certain discreet items. Excluding discreet items, we expect the tax rate to remain in the range of 32% going forward. We have 3 plant maintenance outages in the third fiscal quarter and 3 planned outages in the fourth fiscal quarter. In total, these outages should reduce production by approximately 2,000 metric tons in the third quarter and 3,000 metric tons in the fourth quarter. In calendar 2013, we expect to produce and sell approximately 110,000 metric tons of silicon metal, not including the material produced for our joint venture partners, partner at Alloy and Becancour, and 120,000 metric tons of silicon-based alloys. We would now like to open the call to questions.

[Operator Instructions] The first question comes from Luke Folta of Jefferies. Luke Folta - Jefferies & Company, Inc., Research Division: First question I had, Jeff, I just wanted to recap -- make sure I understood what you said regarding the contracts for this year. I think you said -- did you say over half variable -- 80% booked, over half variable?

Yes. Luke Folta - Jefferies & Company, Inc., Research Division: Okay. And can you talk at all about where the fixed prices that you've got signed, how they compare to the prior year, just for modeling purposes?

Typically, what we talk about, Luke, is we always talk about our pricing as it relates to the indexes. And as we have done in the past, the pricing that we have on the firm business this year in aggregate is higher than the current indexes and typically, things are priced off of the indexes. And then in aggregate, if you look at all of the index business, we would see a similar thing. Luke Folta - Jefferies & Company, Inc., Research Division: Okay. You see, I'm not sure I have access to all the indexes that are out there. The ones that I see are in the low $1.20 per pound range. Is that a...

Yes, they are -- I mean, some have a range, some have a number. I saw the Ryan's Notes before the call and the Ryan's Notes, for instance, is $1.20 to $1.25. But you're right, they would be in that range. Luke Folta - Jefferies & Company, Inc., Research Division: Okay, that helps. And also, as it relates to coal sales, is that -- I mean, you didn't say much about it in the prepared remarks. Can you talk about what we're seeing there as far as external sales in terms of -- in regards of pricing? Are we seeing any upward movement or downward movement, or how should we think about that?

Well, we've been able to validate the belief that our coal is superior to the Colombian coal. And we've been able to achieve a price that's in line with what our expectations were when we first completed the acquisition, which we indicated to you were very significant price increases over what we had been paying for the coal when we were customer of the previous owner of Alden. So the pricing has been validated now with third parties. We are using about 80% of the coal that we take out of the mines for our own plants and selling roughly 20% to third parties. But the pricing is, as expected, it's significantly higher than what we have been paying when we were a customer of Alden, and we expect to continue to see increases over the coming year.

Just to add to that, Luke, on the operating side, I mentioned in my comments that we were looking for a record year up at the Becancour plant. I think I stated this on the last call, one of the big reasons behind that is that Alden coal and the fact that this coal is so reactive with quartz. Luke Folta - Jefferies & Company, Inc., Research Division: Okay. But as far as -- for modeling purposes for next year, should I kind of assume more of the same as compared to what we saw in the second half of '12, from a contribution perspective?

Are you referring to coal in particular? Luke Folta - Jefferies & Company, Inc., Research Division: Yes.

No, we would expect to continue to increase sales to third parties of the Alden coal. We have salesmen traveling the world, talking to all of our -- all the silicon metal producers. We have a significant number of sales, of test amounts of coal that are being run by our competitors around the world. And we believe they'll achieve the same results that we have, which is significantly better than the alternatives. So we do expect to sell more coal to third parties over the year. We can't give you a particular amount. But we believe, at some point, it will require the opening of additional mines to increase the sales to third parties at those high prices that we were talking about earlier. Luke Folta - Jefferies & Company, Inc., Research Division: Okay. And you have not made a decision just yet to do the mine expansion?

That's correct. We have several properties that are capable of producing significant amounts of additional ultra-low ash coal, but we have not taken the decision right now to open a new significant mine. Luke Folta - Jefferies & Company, Inc., Research Division: Okay. And -- that's good. Can you talk about your SG&A in the quarter? A nice step down sequentially and there's been some cost improvements in -- that you have mentioned. But is that number something we could think about being a sustainable rate going forward?

It's probably too low. There was an adjustment for variable comp expense for all of calendar 2012 in the quarter, that was $1.6 million of the roughly $1.9 million decline in SG&A on a pro forma basis. Probably half of that may be permanent, but not all of it. Luke Folta - Jefferies & Company, Inc., Research Division: Okay. And then just lastly. But in the past, you've been willing to give at least some directional indication of where EBITDA might be in the current quarter. Would you be willing to give us some sense?

We really wanted to give you the building blocks, if you will, to be able to calculate that without giving you the number. I think we'd say, directionally, with today's spot pricing, which we would expect to increase as the year wears on as you heard on this call, both for silicon metal and the silicon-based alloys, and we're seeing bright spots in both of those marketplaces or all those marketplaces, we would expect to see a decline in earnings in calendar 2013 over 2012 based on those decreases in average selling prices. However, we are reducing costs, as you heard us talk about just before, very successfully, actually, in this quarter, as demonstrated. And we are increasing revenue in things like coal and our by-products as we've talked about recently, related to fume and Jeff talked about just earlier. So although at today's selling price -- today's spot pricing, we would see decline, we don't expect that to be continued through the year. So it's not a dramatic decline, but with ASP, we would expect to see, in the coming quarter, a modest decline.

The next question is from Garrett Nelson of BB&T Capital Markets. Garrett S. Nelson - BB&T Capital Markets, Research Division: Jeff and Mal, most of my questions were just answered. You did mention possible acquisitions in the press release. Do you see some opportunities out there at the moment more than, say, you saw as of the last earnings call?

We do. This is a very good environment for us. We're seeing capital constrained sellers or large strategic sellers that have units that have no -- of a little interest to them at the moment and they don't want to deal with because they're focused elsewhere. We are seeing a volume of opportunities that meet our screening requirements that are more than we've seen in the last couple of years. So we like the fact that our balance sheet so liquid. We have a lot of cash. As you know, we have unused borrowing capacity. We know specifically what we're looking for. We obviously have been deeply involved in this industry for a very long time, so typically, we'll have seen a company that's up for sale, we'll have looked at it the last time and maybe even the time before that, that it's sold and we'll know the property well, and we are seeing more opportunities now that we've seen over the past few years. Garrett S. Nelson - BB&T Capital Markets, Research Division: Sure. Could you also repeat the silicon metal and silicon-based alloy shipment guidance?

We expect for calendar 2013, that excluding the -- our joint venture partner, we will produce and sell about 110,000 tons of silicon metal and 120,000 tons of silicon-based alloys. Now we do have the ability, in some of our furnaces, to change between the 2 product sets. So we may change through the year, but this is our expectation as of now.

Next is Ian Corydon of B. Riley & Co. Ian Corydon - B. Riley & Co., LLC, Research Division: Could you just talk a little bit more about the joint venture increase in silicon metal prices? At what joint venture was that? And is that going to be sustained?

No, we don't expect it to be sustained. And that was the one area of cost where we were disappointed. There were a couple of events, one was planned, one was unplanned, and they lead to increases in the cost at our alloy, West Virginia and our Becancour, Canada plants. Both of those have been addressed. The one planned is completed. And the unplanned has been fixed and remedied and we see cost coming down. So although we were able to, in the rest of our plants, reduce costs quarter-over-quarter, and that manifested itself in only the modest, very small drop in earnings despite the drop in sales, we did see increases in cost, and our joint venture partner bears 49% of that at those 2 plants. Ian Corydon - B. Riley & Co., LLC, Research Division: That's helpful. And on the inventories, did you build silicon alloy inventories as well? And then how long will you look to hold the extra silicon metal inventories? I assume you'll wait for better pricing, but a little guidance there would help.

Yes, I mean, just in general, Ian, as I said in my comments that as we did a couple of years ago, we're presenting with some of this much lower price business at the end of the pricing season, and we passed. And we would look to sell that material as we go through the first and second quarter as we see more opportunities. Ian Corydon - B. Riley & Co., LLC, Research Division: Okay. And that was primarily silicon metal, not silicon alloys?

There were some of both. I mean, it was a combination. Ian Corydon - B. Riley & Co., LLC, Research Division: Okay. Last question, just a clarification on the March quarter production guidance. The decline of, I guess -- well, actually both quarters, the March and the June quarters, the expected decline in shipments. What base is that off of? Is that off of the December quarter base? I'm not sure how to model that.

Right. So what we wanted to do is, because in the past, there was a little -- we weren't clear enough, we don't think, on outages. We wanted to be clearer on the plant maintenance outages. And by way of saying that there are going to be 3 outages in our Q3 and 3 in our Q4, and that will reduce production by 2,000 tons in Q3 and 3,000 tons in Q4, we were trying to say that, that's average or below-average for us for a quarter. So the guidance of the 110,000 metric tons of silicon metal and the 120,000 tons of silicon-based alloys, basically, you can divide that by 4 and use that as your guideline for the first -- for the last 2 quarters of fiscal 2013 because those 2,000 and 3,000 metric ton outages or lost production due to outages really falls within our expectations.

And Ian, just add to that and really, everybody on the call. I had mentioned in my comments the one outage in the fourth quarter. I was really referring to the major outage. We have a couple, as Mal mentioned, 3, we have a couple of minor outages at the plants. We'll take the furnaces down for maybe 2 or 3 days literally. The outage I was referring to was more of an annualized, every 18 month outage, where we have a furnace down for 30 to 45 days.

Next is Mark Parr from KeyBanc.

One question, point of clarification. I think in your first quarter call, you had said that you were looking for outages and outage-related volumes, et cetera, to impact the second quarter by $3 million. And I see in the -- in your -- in the waterfall picture here on Chart 6, you've got prior quarter outages as a $3 million positive. I was wondering if you could help me reconcile those comments from the 1Q in this slide?

Right, there are 2 different issues. The -- what we talked about in last quarter's call was indeed an expectation that earnings would be down quarter-over-quarter roughly $2 million to $3 million, and I believe, is what we said. And that was due to expectations of cost of production in the second fiscal quarter. Our costs came in lower than expected and that, along with the SG&A decline, is why we were only very modestly down in earnings despite the drop in shipments. So that's why we performed a couple of million dollars better than we had expected. On the slide, that $3 million is different. That is $3 million related to unplanned power outages, blackouts, at 2 of our plants that occurred in the first fiscal quarter at Bridgeport and Alloy, West Virginia. And that impacted that quarter, the first quarter, by $3 million. And so thankfully, we didn't have any events like that in our second fiscal quarter.

Okay. Yes, just along those lines, is there anything we should be thinking about as far as new electricity contracts or electricity cost momentum heading into the second half or into the first part of fiscal '14?

No, Mark. I mean, we typically will see slight increases when you look across the board, in aggregate, on our power costs. Single-digit increases, but there'll be nothing really that will stand out.

The next question is from Thomas (sic) [Tom] Van Buskirk of Sidoti & Company. Tom Van Buskirk - Sidoti & Company, LLC: One question on fumes that you talked about earlier. I wonder if you could give me a little bit of a sense of how that business has developed versus, say, 1 year ago, whether it's larger in terms of revenue now? You said you're cranking out about the same amount in terms of tonnage, but are there any differences going on in pricing? Or is anything else happening that's changing that and making it more of a [indiscernible]?

The answer is yes. I spent a little bit of time talking about it in my comments. And as we go forward, we're going to talk more about it. And first of all, we see this not so much as a byproduct, but as a product. When you look at our company today, we have -- we're pretty much known as a silicon metal company, but really, we have a number of different important pieces of the company. We have silicon metal. We have silicon alloys. We have different types of silicon alloys that go into different markets. We have silica fume, which we're going to be spending a lot more time on. We have coal. But really, to talk about fume, yes, we are taking a much more active role in the sales and marketing of fume. I talked about increasing prices across the board. And we're talking 100,000 tons, and all of it going to growing markets, going into the oil and gas exploration market. Fume is a major ingredient that goes into the concrete/grout that goes around the pipes, that go into the oil wells for the frac-ing, and also, for underwater. It's a major ingredient that goes in the concrete for the construction of buildings, infrastructure, things here in the city like the Freedom Tower, dams, things like that, bridges. So we are taking a much more active role realizing the importance of fume to all the end markets in the country. And we are the major producer of fume now in North America. So yes, we see upside. We're excited about it. We like the fact that all the end markets are growing, so it should do very, very well for us. And we'll be talking more about it. Tom Van Buskirk - Sidoti & Company, LLC: And just one follow-up, if I may. In terms of silicon metal and alloy prices, you clearly seem more sanguine about it than a few months ago despite the indexes being where they are and...

What did you say again? For what? Tom Van Buskirk - Sidoti & Company, LLC: I'm sorry. I was just -- I'm wondering where the -- if you could give some specifics about where the optimism comes from in terms of end markets in silicon metal and alloy prices. What are you seeing out there that's making you feel better about it?

Sure. Sure. Well, first of all, the pricing has started to move up. If you look at the indexes, the indexes are starting to move up a little bit, a couple of cents. But when you look at the end markets for silicon metal, the biggest end market is silicones. And silicones are in hundreds of things that we touch and use every day. The silicones business has been and will be, again, this year, talking to the customers, a GDP plus 3%, 4% growing business. Two of the things that are helping that are homebuilding, housing starts are up, automotive is up. There are silicones throughout an automobile in the interior, in all the hoses in the engines, in the tires, in the coatings and everything. So automotive is helping. Housing is helping. It's just all the different consumer products that we use everyday, that's about 50% of all the silicon metal. About 40% of all the silicon metal ends up in aluminum and predominantly, castings. A big part of that would be -- would end up in the automotive market and the industrial market. Again, the automotive market, the numbers I'm seeing, automotive market's going to be stronger this year than last year, so that should bode very, very well for us. Then last but not the least is solar. Solar is about 10%. And there's still a lot of poly inventory out there. The solar market is growing. The solar market is still the fastest growing market out there. We're seeing numbers of 35 to 36 gigawatts installed this year, so the solar market is also a strong market. Now there's a lot of poly inventory that we've got to liquidate through the system, but we're still selling to the chemical companies that are making the polysilicon. So just to recap, we've got silicones growing. We've got auto growing, aluminum growing, and we've got solar. And to cap all that out, there's no new capacity being built.

[Operator Instructions] The next question is from Phil Gibbs of KeyBanc.

Just trying to put all the pieces together here. So I think silicon metal prices will likely be down a little. Ferrosilicon looks like to be heading in the up direction, and those are set quarterly. Your volumes are picking up. Your production cost momentum is moving lower. It would seem like down EBITDA, in my mind, sequentially, would be a very conservative representation. So just trying to figure out what we're missing here, if that is indeed what you're saying.

Right, Phil, I agree with your second 2 points. Costs are trending in the right way, and we expect them to be sustained and, hopefully, see continued reduction. The alloys, particularly ferrosilicon pricing, is starting to pick up. We're seeing that in spots and that's very encouraging. Silicon metal though, you have to refer back to the average that we achieved for calendar 2013, which includes fixed base -- fixed-price contracts, which were signed at the beginning of the year. So with that, the difference between today's spot and the fixed contracts that we saw in the beginning of 2012, there is a decline in the average selling prices of silicon metal as of today. That's the reason for the expected modest, not a large decline, in earnings sequentially, but the expected modest decline at today's spot pricing. I mean, I don't want to give you exactly how many pennies we're expecting the average selling price to decline with today's spot, but it is a small decline, and that likely would drive the decrease. Now going forward into calendar 2013, we do expect to see a pickup, but at least initially, somewhat of a decrease is probably appropriate for you to think about.

You're talking a decrease on the adjusted earnings and EBITDA, correct?

Yes, correct.

Next we have a follow-up from Luke Folta of Jefferies. Luke Folta - Jefferies & Company, Inc., Research Division: One last quick one. Just something I've been focusing on or looking at here is that they've -- the Chinese have recently eliminated export taxes on silicon metal. And I'm just curious to know, I think it was like a 15% tax or so, I know there's not a lot of Chinese direct sales, but to the extent that, that product is exported elsewhere, say, into Europe or other markets, is that something that you think could hold back the silicon metal price recovery this year? Just curious on your thoughts on how that might work.

I would say, no. I've read some of the press, and they've talked about the fact that, that's happening could even lead to a higher internal price in China. But let's just keep in mind that there is no Chinese silicon coming into the United States. And silicon is only made in 5 or 6 parts of the entire world. So China is feeding demand within China. And China is also feeding much of the demand in developing nations, like India and the Middle East and Japan and Korea. So much of that Chinese silicon is going into those markets staying China. There's also a lot of capacity down in China, and then a little bit filters into Europe. But really, when you look at our business, a majority of our silicon business now is in North America, the balance in Europe, and we ship a little bit into Asia.

I am showing no more questions in the queue. And I would like to turn the conference back to Mr. Jeff Bradley.

I just wanted to say thank you to everybody. We really appreciate everybody's interest. We're really excited about this year and all the things we have going on within the company. We're really excited on the acquisition front. And we look forward to talking to everybody again on the next call. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.